Yahoo Finance How Financially Strong Is WPP plc (LON:WPP)?
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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as WPP plc (LON:WPP) a safer option. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of WPP’s financial liquidity and leverage to give you an idea of WPP’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into WPP here.
See our latest analysis for WPP
Does WPP Produce Much Cash Relative To Its Debt?
Over the past year, WPP has maintained its debt levels at around UK£6.7b including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at UK£2.6b to keep the business going. On top of this, WPP has generated UK£1.7b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 25%, indicating that WPP’s operating cash is sufficient to cover its debt.
Can WPP meet its short-term obligations with the cash in hand?
Looking at WPP’s UK£17b in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.96x. The current ratio is the number you get when you divide current assets by current liabilities.
Can WPP service its debt comfortably?
With a debt-to-equity ratio of 68%, WPP can be considered as an above-average leveraged company. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if WPP’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For WPP, the ratio of 8.08x suggests that interest is appropriately covered. Large-cap investments like WPP are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
Although WPP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I'm sure WPP has company-specific issues impacting its capital structure decisions. You should continue to research WPP to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for WPP’s future growth? Take a look at our free research report of analyst consensus for WPP’s outlook.
Valuation: What is WPP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether WPP is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
